Guru Ray Dalio (Trades, Portfolio), who has had tremendous success with his hedge fund Bridgewater Associates, appeared on an India-based TV station for a lengthy interview on Oct. 29.
Dalio is not a classic value investor. But his positions suggest the firm's top-down approach steers it towards value corners of the market anyway. He tends to offer insightful market views that can be out of the box. What stands out in the interview is how much more careful he appears just a month after he was talking about the market being in the seventh inning.
Here’s a summary of his current market view.
Where are we now?
In the short-term debt cycle we are nine years along. Asset prices are very sensitive to interest rate changes. Central banks are tightening monetary policy. We are also late in the long-term debt cycle.
This means central banks have squeezed a lot out of the economy. Interest rates are very low. Monetary policy cannot be expanded far anymore. If there’s a downturn, there is not much power the central banks can exert.
This situation is analogous to 1937. When financial prices went up, this exacerbated a wealth gap. That wealth gap is producing populism. It puts people who are populist in power. These people are strongly dogmatic, more nationalist, more protectionist, more militaristic.
What assets to buy?
Dalio doesn’t seem to like very many assets. He does not like equities. He does not like bonds. He does not like the U.S. dollar. He does not like the euro.
He suggests putting 5-10% of a portfolio in gold and weighting towards the higher range later in the cycle. He does not know where we are exactly, but we are pretty late in the cycle.Â
How to invest?
Dalio does not like any of the major asset classes except for gold. However, he later added that achieving a balanced portfolio is the most important thing. This is what Bridgewater accomplishes in its All-Weather portfolio.
Do not have too much exposure to any kind of environment, he said. Good diversification will reduce your risks without reducing your expected returns.
Diversify across countries, currencies and asset types. Definitely diversify away from assets based on debt growth, money printing and interest rates declining.
Dalio’s portfolio
GuruFocus tracks Dalio's 13-F filings. These types of filings show only U.S.-listed equities, mainly stocks, ADRs and ETFs. That means bonds and foreign-traded stocks do not show up. The top 20 positions show a 6-7% allocation to gold through the SPDR Gold Trust (GLD, Financial). There is a 34% allocation to emerging markets through Vanguard FTSE Emerging Markets (VWF, Financial) and iShares Core MSCI Emerging Markets (IEMG, Financial), among others.
Disclosure: Author is long some gold.
